Japan's Banking Crisis Rubber Rules Term Paper

The Japanese economy stagnated since 1990:

when real Gross Domestic Product (GDP) grew at an average of just 1.2%.

Since 1995, growth was extremely slow averaging less than 0.7% on year-to-year basis." ("Banking Crisis... "5) During the last quarter of 2003, however, the GDP increased 7% (Annexure 2), the most since 1990, demonstrating growth rate of 2.7%, for the entire year. Some economists argued, however, this 2003 growth did not reflect a complete economic recovery but signifies a short-term phenomenon, not a long-term reality.

Nakamae contends that the BOJ's reaction to the Japanese weakening economy only weakened the economy further and that doing nothing would have been better than the steps Japan took and further argues that.".. central banks react to economic bubbles by creating further bubbles....

Amid the economic and political fallout that descends when a bubble bursts,... In an effort to boost demand and thereby reduce the fallout from the bubble's bursting... such intervention only creates another bubble."(Nakamae)

Japanese bankers, Arayama, and Mourdoukoutas (6) argue, do not possess the aptitude, the facility, and the motivations to manage banks as for-profit business, consequently failing to save themselves or their customers. Additionally, a final contention they (Ibid) present in their work is that an American-style rescue package could not cure for Japan's banking crisis as Japan's banking system radically differs than that of the United States. Neither will merely cleaning balance sheets from non-performing assets, although necessary, cure Japanese and banks afflictions, as the condition requires:

Japanese... managers must behave as for-profit institutions where managers are accountable to the owners and stockholders.

Japanese... managers must be freed from government directives (China) and guidance (Japan) that control their day-to-day operations and must restrict their freedom to develop new products and businesses.

Japanese... bank managers must learn to behave as true bankers (i.e., learn how to manage financial risks and function as public trading corporations, especially how to deal with transparency and full disclosure rules and regulations, as is the case with their Western counterparts)." (Ibid 7)

During the early 1990s, the Ministry of Finance created a three-step plan, more troubling efforts, to attempt to respond to Japan's banking crisis:

For the first step, funds totaling 60 trillion yen.".. were set aside for banking sector, which roughly formed 12% of GDP."

From the 60 trillion yen,.".. 25 trillion yen were set aside for recapitalizing the weak banks, 18 trillion yen for dealing with insolvent banks, and 17 trillion yen for deposit protection." (Ibid) Attempting to help banks stabilize, the Japanese government tried to infuse this money into the system.

The second step was.".. To accelerate disposal of non-performing loans." (Ibid)

The third step focused on selling restructured loans. ("Banking Crisis... "3)

In 1992, in efforts to reach the second and third objectives, the Cooperative Credit Purchasing Company was created to purchase and then resell the financial institutions' real estate loans on behalf of the banks. The Financial Supervisory Agency (FSA), a new supervisory agency, which was designed to monitor financial institutions' and banks' performance, was permitted to also of supervise the Cooperative Credit Purchasing Company's asset disposals, monitoring the recovery process. Other inadequate recovery attempts included:

The Jusen Companies, which incorporated strong connections with the Japanese mafia, also known.".. As Yakuza, proved to be one of the major hurdles in the Japanese banking reforms... Later, it was also revealed that some officials in the Ministry of Finance had strong links with Yakuza." (Ibid)

The Deposit Insurance Corporation (DIC), was another avenue the banks attempt to take shelter in to overcome the cash crunch. Although the DIC contributed substantial amounts of money into the banks, their resources were not adequate. (Ibid)

Big-bang reforms, introduced by the Japanese government in 1998, intended to rectify and stabilize the financial system.

The Keiretsu System, or industrial groupings (banking; steel; trading; gas; etc.), contributed to the collapse of the banking sector. This common practice among the Japanese industries interlocked shares where the banks held percentages of firms' shares within keirets, and firms also owned a percentage of bank shares. This cross-holding pattern enabled firms to easily secure bank loans and afforded protection from aggressive take-overs. Mitsubishi, Mitsui and Sumitomo were part of the Keiretsu system.

Shinsei, a Japanese word which means "a new beginning," formerly known as Long-Term Credit Bank (LTCB), collapsed in 1998.

The Japanese government spent nearly seven trillion yen or $66 billion trying to restore LTCB's 20 billion yen to restore LTCB." (Ibid 4) This 2004 "deal" notes the first time a Japanese bank had been sold to a foreign company.

In their focus on bank rescue packages, as well as, troubled banks' behaviors related to rescue packages, Corbett, Mitchell, and Winton (474) state, "Despite the frequency with which banking crises occur, relatively few formal analyzes of regulatory responses to crises have been undertaken... Much of the literature on bank regulatory policy suggests that bank rescues are inefficient and can worsen banking-sector problems." As prompt-corrective-action type regulation tenor attempts to avoid bailing out poorly capitalized banks, this is recommended to be a first-best response policy. As in Japan's case, however, efforts proved too late for this type and other policy responses.

At times, ironically, policy authorities present bank rescue plans' offers, yet banks hesitate to accept them. Japan and Thailand, in recent years, illustrate examples "where government offers of recapitalization have been received unenthusiastically by private banks. Yet the failure to get banks to recapitalize, and to restructure and write off nonperforming loans, has been one reason for poor performance in the real economy in both cases." (Ibid) More positive examples, on the other hand, include Norway, Sweden, and Korea, where recapitalizations served as solutions to banking crises.

A crisis often stimulates reform.

During 2001, Rowley reports that the Japanese banking system has not yet qualified as full-blown crisis but that the crisis was growing. Japanese financial authorities, who had avoided radical action for almost a decade, were offering solutions "... nearer to the root of Japan's massive bad debt problem by enabling the official resolution and collection corporation (RCC) to purchase problem loans from banks on a meaningful scale and at realistic prices." (Rowley) Previous unsuccessful attempt to rescue Japan's banking system from its troubles after the bubble economy collapsed in 1991 included:

Decision to inject public capital, as amounts provided paled alongside the actual problem's size of the problem

Prime minister Junichiro Koizumi's promise to compel Japan's 16 leading banks (during two - three years) to write off [yen] 11,700bn of nonperforming loans (NPLs). Once more, not enough. (Ibid)

Compelling banks to write off bad loans and recapitalizing them will not work, Rowley argues, as he cites some analysts to state: "Injecting fresh capital is like stopping just one hole in a dyke behind which the build-up of flood water is quickly rising." Writing off bad loans not only threatens to devour nearly all of major banks' profits during the next few years, it would force most likely net bankruptcy for tens of thousands of dramatically, indebted small businesses. (Rowley) One solution, according to Rowley, that appears inevitable, is to remove hefty debt problem segments from banks' balance sheets.

During 2001, a number of primary Japanese banks considered tapping into their legal reserves to secure dividend payments' funds. By the end of 2001, the banks were to decide whether to follow through with this particular plan.

Although rare for banks to tap their legal reserves, part of shareholders' equity, several years prior to 2001, approximately eight leading banks accepted some [yen]9000bn of public capital injections and issued preference stock to the government. If banks have to pass a full year's dividends on these stocks, the Japanese government may convert to equity, becoming a controlling shareholder, and in turn nationalizing the banks.

Mizuho Holding, Mitsubishi Tokyo Financial Group and UFJ Holdings, three of Japan's mega banking groups - issued loss warnings during 2001. Nikkei 225 share index lost 25% during the first half 2001(lowest level since 1983). At the end of September in 2001, according to Daiwa Research Institute's estimates,.".. latent losses from stockholdings at Japan's top eight banking groups were around [yen]5lOObn.." (Ibid)

Arayama, and Mourdoukoutas (6) argue that nurtured under a fast-growing economic environment, "main bank" keiretsu relations, and tight government regulation that virtually controlled bank management behavior, eliminated competition, and rationed credit, according to MITI and MOF priorities, Japanese banks have grown up as abacus bankers." The Japanese banking system, these authors purport, functioned as a record keeper of the course of money; not as a genuine banker, one who manages investment risk. Currently, the use of ATM machines to replace abacus-calculators in monitoring money in; through; out of the banking system, is the primary difference from then to now.

Japan's prolonged banking crisis demonstrates policy limitations dealing only with nonperforming assets. Japan, such as China and several other Asian countries, take the approach toward globalization, which emphasizes:.".. social over individual values, relations over market efficiency, and evolution over revolution." (Ibid 169)

Since the early 1990s,…